J.G. Summit Holdings, Inc. vs. CA

2G Sales and Lease Case Digests
J.G. Summit Holdings, Inc. vs.

Court Of Appeals
G.R. No. 124293
January 31, 2005
The right of first refusal ensures that the parties are given control over who
may become a new partner in substitution of or in addition to the original
Doctrine Used:
partners. No one can become a member of the partnership association
without the consent of all the other associates.
FACTS:
The National Investment and Development Corporation (NIDC) entered into a
Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe,
Japan (KAWASAKI) for the construction, operation, and management of the
Philippine Shipyard and Engineering Corporation (PHILSECO). Under the
JVA, the NIDC and KAWASAKI will contribute P330 million for the
capitalization of PHILSECO in the proportion of 60%-40% respectively. One
of its salient features is the grant to the parties of the right of first refusal
should either of them decide to sell, assign or transfer its interest in the joint
venture.
NIDC transferred all its rights, title, and interest in PHILSECO to the
Philippine National Bank (PNB). Upon the enactment of Administrative Order
No. 14, said interests were subsequently transferred to the National
Government. President Corazon C. Aquino issued Proclamation No. 50
establishing the Committee on Privatization (COP) and the Asset Privatization
Trust (APT) to take title to, possession of, conserve, manage, and dispose of
non-performing assets of the National Government. Thereafter, a trust
agreement was entered into between the National Government and the APT
wherein the latter was named the trustee of the National Government’s share
in PHILSECO.
As a result of a quasi-reorganization in PHILSECO, the National

Government’s shareholdings in PHILSECO increased to 97.41% thereby
reducing KAWASAKI’s shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the
APT sold the National Government’s share in PHILSECO to private entities.
Eventually, the APT and KAWASAKI agreed that the latter’s right of first
refusal under the JVA be “exchanged” for the right to top by five percent (5%)
the highest bid for the said shares. They further agreed that KAWASAKI
would be entitled to name a company in which it was a stockholder, which
could exercise the right to top, wherein the said company would be the
Philyards Holdings, Inc. (PHI).
At the public bidding, petitioner J.G. Summit Holdings, Inc. submitted a bid of
P2,030,000,000.00 with an acknowledgment of KAWASAKI/[PHILYARDS’]
right to top. Petitioner was declared the highest bidder and the COP approved
the sale, but it was subject to the right of KAWASAKI/[PHILYARDS] Holdings,
Inc. to top JGSMI’s bid by 5%. However, the APT notified petitioner that PHI
had exercised its option to top the highest bid and that the COP had
approved the same.
2G Sales and Lease Case Digests
Petitioner submits that since PHILSECO is a landholding company,

KAWASAKI could exercise its right of first refusal only up to 40% of the
shares of PHILSECO due to the constitutional prohibition on land-holding by
corporations with more than 40% foreign-owned equity. It further argues that
since KAWASAKI already held at least 40% equity in PHILSECO, the right of
first refusal was inutile and as such, could not subsequently be converted into
the right to top.
Meanwhile, respondents assert that since the right of first refusal was validly
converted into a right to top, which was exercised not by KAWASAKI, but by
PHILYARDS which is a Filipino corporation then there is no violation of the
Constitution.
Whether or not, under the 1977 JVA, KAWASAKI can exercise its right of first
ISSUE/S:
refusal with a maximum of 40% of PHILSECO’s total capitalization.
No, KAWASAKI can exercise its right of first refusal with a maximum of more
RULING:
than 40% as PHILSECO is not a public utility.
The right of first refusal ensures that the parties are given control over who
may become a new partner in substitution of or in addition to the original
partners. No one can become a member of the partnership association
without the consent of all the other associates. Should the selling partner
decide to dispose all its shares, the non-selling partner may acquire all these
shares and terminate the partnership. However, there are constitutional
restrictions in the maximum allowable shares that a partner may acquire,
such as that of foreign ownership on public utility. Under the basic corporate
law principle, the corporation and its stockholders are separate juridical
entities. Thus, there is no law that disqualifies a person from purchasing
shares in a landholding corporation even if the latter will exceed the allowed
foreign equity, what the law disqualifies is the corporation from owning land.
RATIONALE:
In this case, KAWASAKI can acquire more than 40% of PHILSECO’s shares
mainly because the latter is not a public utility; otherwise, it can acquire only a
maximum of 40% of PHILSECO’s total capitalization despite the grant of first
refusal. This right of first refusal allows them to purchase the shares of their
co-shareholder before they are offered to a third party. The agreement of co-
shareholders to mutually grant this right to each other, by itself, does not
constitute a violation of the provisions of the Constitution limiting land
ownership to Filipinos and Filipino corporations.
Hence, the constitutional prohibition would have applied if PHILSECO were a

public utility, but since it is not, KAWASAKI may purchase more than 40% of
PHILSECO’s total capitalization.
NAME Dana Jeuzel Marcos

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2G Sales and Lease Case Digests

J.G. Summit Holdings, Inc. vs.

As a result of a quasi-reorganization in PHILSECO, the National

Petitioner submits that since PHILSECO is a landholding company,

Hence, the constitutional prohibition would have applied if PHILSECO were a

NAME Dana Jeuzel Marcos

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